BOOM TIMES IMMINENT SAYS ECONOMIST

Written on the 21 March 2011

BOOM TIMES IMMINENT SAYS ECONOMIST

STRONG growth over the next five years has chief economist Dr Frank Gelber predicting boom times ahead, but there's more pain for retailers as household spending contracts.

Speaking today at the Brisbane leg of BIS Shrapnel’s Business Forecasting Conference, Gelber says Australia’s fiscal policy needs tightening.



“The carbon tax issue is a problem that needs addressing and I think it’s going to grab our attention for the next two years at least and a resource tax will also come back in a diluted form,” he says.

Gelber also highlighted labour shortages and immigration as issues that must be addressed.

“We need to boost immigration and training programs if we’re to have a labour force that defers labour shortages because this will constrain growth over the next five years.

“The real problem over the next couple of years will be skilled labour shortages, but I think growth will be strong and there is a boom coming.”

Gelber attributes the sluggish performance of the Queensland economy to decreased investment.

“The real reason the Queensland economy has been so weak over the past two years is because investment, particularly in the construction industry has fallen and it hasn’t just fallen in the private sector, but in the public sector as well. I think part of the reason for that was because projects were completed and weren’t replaced,” he says.

Global Financial Crisis (GFC) is a term that ought to be remembered but not harped upon if the city is to move forward.

“We need to look forward and focus on growth for the next five years and a lot of businesses are looking backwards, as if the GFC is going to happen again and that puts a constraint on the activity that is required to grow the economy,” says Gelber.

“This makes businesses and consumers cautious and excessive caution in our debt and equity markets is constraining activity to the extent that it’s making sure that we’re going to have a shortage of capacity.”

He outlined an upswing to come on the back of income increases and employment as inflation is curbed.

“The GFC corrected inflation prices, so we’re no longer overvalued and that was the first part of the correction that occurred – the second part, which we haven’t seen yet, is the rise in incomes.

“Unemployment currently sits at five per cent and we’re already seeing the emergence of skilled labour shortages.

“The RBA is looking at increasing interest rates and this is just the beginning – it won’t be a monthly increase though, it will occur over the next couple of years.”

Smashed consumer confidence reflected in record low lending

While Gerber’s upswing could happen in the next five years, a more daunting and immediate prospect is facing retailers.

ABS statistics released today that show the cautious consumer market has smashed national lending finance, as economists predict retail to never return to its ‘golden age’.

Personal finance experienced the largest drop according to the lending statistics for the January period, down 9.5 per cent to $6.9 billion. Commercial finance is also down 5.8 per cent to just under $31b, while the deficit in housing lending is 4.6 per cent to around $14b.

Deloitte Access Economics partner David Rumbens, says for the first time in a decade, household savings growth is exceeding the rate of spending growth.

“We’ve seen for a little while the rate of growth in personal and housing finance has been modest at best. There is increasing growth in jobs but spending growth is very subdued,” he says.

“It reflects that people are using the additional money to pay off debts and increase their savings. It’s a very different consumer market than we’ve seen over the last decade.

“Household savings growth is up as high as 10 per cent in some areas. For the first time in a long period they’re saving more than they’re spending and most of that is being used to pay off personal debt and home loans.”

BIS Shrapnel associate director of economics Richard Robinson, says the data spells bad news for retailers.

“The drop in housing finance is a little surprising given rising demand driven by population growth, but it all comes down to the changed attitude of consumers,” says Robinson.

“Unlike the last 10 years, people are no longer taking out finance against their homes and spending outside of their means. They’re heeding the RBA’s warning that rates will be increasing.

“The reduction in business lending is also expected, given the tough conditions for small business owners. The overdraft on commercial properties is much higher than home loans.

“The wider banking sector is still in a good position despite reduced loan applications, but the retailers need to recognise that they’ve have had their golden age.

“The growth in retail will likely return to the rate of the 80’s and 90’s, where it was 2.5 per cent; rather than the 4 per cent we’ve seen in the last decade.”

Rumbens says some retailers may find solace in the historical trend for consumers to begin higher spending once the psychological effects of an economic downturn subside.

“Following the last recession in the early 1990’s consumer spending growth was very low, but by the late 90’s it had increased again to a high level,” he says.

“So it seems people do have a tendency to eventually forget about the tough economic conditions and regain consumer confidence. So this might only be a short-term trend.”


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